Shining a Spotlight on Fiduciary Liability

When it comes to fiduciary liability exposures, it appears that clients could be in the dark. A recent survey by Travelers took a critical look at agent perceptions about their clients’ fiduciary liability knowledge. More than 250 agency professionals weighed in, painting a drab picture of fiduciary liability awareness among clients.

On one hand, the findings are troubling: too many clients may be operating their businesses without a liability safety net. On the other hand, it spells significant opportunity for agents. By educating clients about their fiduciary status, agents can both identify an overlooked problem and provide an immediate solution.

When it comes to fiduciary liability, ignorance is risk. According to the Travelers survey, agents believe that more than half of clients generally do not understand whether they have a fiduciary duty. If agents are right, those clients are facing significant unknown risk. Moreover, clients who wrongly assume they are not fiduciaries are in for a very expensive lesson because the Employee Retirement Income Act (ERISA) provides that fiduciaries shall be held personally liable for losses resulting from any breach of ERISA’s strict fiduciary standards.

Generally, anyone responsible for managing plan assets or who has discretionary responsibility for a plan’s administration is a fiduciary. It is exceedingly common for companies sponsoring employee benefit plans, their boards and certain executive officers to have fiduciary status, whether they know it or not.

When asked to name the top three reasons clients don’t purchase fiduciary liability insurance, 79% of agents said clients “don’t feel like there is an exposure.” This supports insurance industry speculation about whether a client even knows if he or she is a fiduciary.

The misperceptions and awareness gaps don’t end there, though. Here are eight more fiduciary liability-related exposures and themes that many clients overlook:

• ERISA lawsuits are prevalent, expensive and frequently won by plaintiffs.
• There are residual duties and potential liabilities associated with reliance on the services of outside investment managers.
• ERISA section 404(c)’s “safe harbor” protections require more than offering a diverse selection of mutual funds, and the protections aren’t as broad as some think.
• The Department of Labor and Internal Revenue Service are showing signs of greater interest in ensuring 401(k) plan compliance.
• Imprudent investing is not the only exposure of ERISA plan
  fiduciaries.
• An employer’s exposure to ERISA lawsuits may be increased by employee layoffs and terminations.
• Failure to comply with the employee benefit plan provisions of the Internal Revenue Code can be costly.
• Unlike fiduciary liability insurance, most forms of insurance do not cover liability for breach of fiduciary duty under ERISA.

According to the survey, agents shared that insurers can provide valuable marketing support when it comes to fiduciary exposures. The survey found that 45% of agents said “helping me better understand exposures” was one of the top three ways insurers could help increase fiduciary liability sales. Agents should seek out providers who can be a partner in advising and supporting clients.

Because clients “don’t know what they don’t know,” providing examples can be an incredibly effective tool for illustrating the importance of managing fiduciary risk. In fact, one-third (33%) of agents said claims examples are the No. 1 piece of support they need to sell more fiduciary.

For example, a small business may not realize they have fiduciary liabilities because of their size, industry or employee base. Using a claims example can be an impactful way to illustrate the value of fiduciary liability coverage and best practices—beyond their dollar amount.

In addition to lack of awareness and education about fiduciary liability, clients may not be fully able to realize the fiduciary solutions they need to protect themselves. This is where agents step in. If clients aren’t aware of potential issues and exposures and don’t understand the ramifications of their risks, clearly there are opportunities for agents to provide guidance, best practices and recommendations for coverage. Any good agent knows that relationships with clients are just as important as the products they buy. Agents have the opportunity to point out an overlooked problem, educate clients about what that problem means for their business and provide solutions.

It also means there is an opportunity for agents to brush up on their understanding of fiduciary liability. They can work with their carriers, consider taking a class or even bring an expert into the agency for a firm-wide seminar. The opportunity for agents in the fiduciary liability space is significant when understanding exactly what they’re selling and why it could help to strengthen their position as trusted advisors.

John Trefry is fiduciary liability product manager for Travelers’ bond and financial products.